U.S. government bond investors are nervous—it’s easy to see why. The last top-notch rating on Treasuries has been taken away, and worries remain about foreign buyers abandoning the market.
Any paper gains from rising bond prices have vanished as yields have risen back to where they were in February. Bond prices have an inverse relationship to bond yields.
After years of overspending, fiscal worries are intensifying as a Republican Congress marches toward a new tax bill that could add $3.3 trillion to the deficit over the next decade. That rattles bond investors who doubt the U.S.’s ability to pay its debt back despite its pristine record. Net effect? Yields could rise further as bond prices could decline more.
Yet, the mounting anxiety is overshadowing a truth—one that can balance out some of the negative narrative. Treasury yields have largely been locked in a tight range since reciprocal tariffs were reversed, hovering mostly between the 200-day moving-average of 4.23% and 4.5% mark at close.The spread between the two-year and 10-year yields paints a similar picture. The gap, which reflects the additional yield for locking up money for a decade instead of a short term, has been in a range of 0.449 percentage points to 0.584 percentage points at close since April 22.
With the gap now near 0.50 percentage points, “it is difficult to argue that the market is on the precipice of a breakout in either direction,” wrote Ian Lyngen, head of rates strategy at BMO Capital Markets.
The tight ranges suggest that Wall Street’s capacity to absorb drama has been high. The worry about the U.S. Treasury market is valid but any panic may be overblown since yields on the 10-year aren’t close to the near 5% level seen in October 2023. The two-year to 10-year spread was wider in April and from 2020 to 2022.
The 30-year yield looks more problematic; it closed at 4.967% on Tuesday, and has flirted with the 5% level since mid-May. That 5% level has long been considered an important psychological threshold. Its been the cap for the 30-year for about two decades.
But the obsession with the 5% level overlooks an obvious positive: It is an attractive level to buy. Bond yields have risen from 1.4% in 2020. The 30-year can also act as a good hedge against losses in stocks if a recession materializes and bond yields fall, pushing up bond prices.
“While we understand the discomfort around 5 percent 30-year Treasury yields, ultimately the benefits of a visible and relatively attractive long-term risk-free rate of return outweigh the costs,” wrote Nicholas Colas, Co-founder of DataTrek Research. “Capital should always reward investors adequately for the risks they take, even when the security in question is an obligation of the US government.”
The bond market has some structural problems: Chinese officials in particular have taken a step back as a buyer and more price-sensitive buyers like mutual funds and hedge funds have grown. It’s a cause of concern that deserves to be watched, but the market isn’t freaking out about it yet.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com.
